Game theory applications in business

Game Theory Post 5: Mixed Strategies Game theory is a tool usually reserved for elite academics and brainiacs who enjoy calculus. For most people, including entrepreneurs and small business owners, the concept can be intimidating. However, what if there were a way to simplify game theory to a point where it was easy enough for practically anyone to use and still provided valuable insights?

Game theory applications in business

Last but not the least we would like to thank our Family members and friends for all their support in the scorching heat in the summers.

The general methods and concepts offered by game theory such as strategies and equilibrium provide useful insights in various business situations and help us understand the dynamics in business interactions and lead to higher quality and more informed decisions. To answer the big question how can we do this?

Some will say it is all about providing a service that the customers like. Some will say it is all about innovation, developing cutting-edge technology. Some will say it is all about being first to the market. But let us rethink about the common thing in all these definations and that is the intraction among the various competitors.

Given that each firm is part of a complex web of interactions, any business decision or action taken by a firm impacts multiple entities that interact with or within that firm, and vice versa.

Ignoring these interactions could lead to unexpected and potentially very undesirable outcomes. Moreover, we have various Hollywood movies that depict the concept of game theory namely: These movies give us the detail how are day to day interaction among the people influence the result and may prove to be useful input for our project.

Game theory is the study of strategic decision making. More formally, it is "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers.

Game theory is mainly used in economics, political science, and psychology, as well Game theory applications in business logic and biology. A game is any situation where the outcome of our action depends on the actions of others. We can describe a Game as the given condition which we are solving or the given problem which we are solving, Some people also describe at the situation where there is interaction between various decision makers is a Game.

Eg Interaction between a bowler and a batsman is a Game; Interaction between two competing companies in a business is a Game. As the name suggest Players are the ones who influence the Game by their decisions. Players are the key to a Game as they are the main decision makers of the Game and they Influence the entire Game.

The rules of the game specify the sequence of moves as well as the possible actions and information available to each player whenever they move.

Rules play an important part in game theory as changing a rule may change entire outcome of the game. In any game payoffs are the numbers which represent the motivations of the player. It sort of assigns a mathematical number which acts as weightage to a given outcome.

Nash Equilibrium

A basic example of Game Theory Two criminal arrested and interrogated separately. Each suspect got two choices either confess or refuse to talk The police does not have sufficient information to convict the suspects, unless at least one of them confesses. If they cooperate, then both will be convicted to minor offense and sentenced to a month in jail.

If both defect, then both will be sentenced to jail for six months.

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If one confesses and the other does not, then the confessor will be released immediately but the other will be sentenced to nine months in jail.

The police explains these outcomes to both suspects and tells each one that the other suspect knows the deal as well. A close look at the outcomes of different choices available to the suspects reveals that regardless of what one suspect chooses, the other suspect is better off by choosing to defect.

Hence, both suspects choose to defect and stay in jail for six months, opting for a clearly less desirable outcome than only a month in jail, which would be the case if both chose to cooperate.

The solution to game solves a variety of business applications. Nash Equilibrium In game theory, the Nash equilibrium is a solution of a game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his own strategy unilaterally.

Game theory applications in business

Game theorists use the Nash equilibrium concept to analyze the outcome of the strategic interaction of several decision makers. In other words, it provides a way of predicting what will happen if several people or several institutions are making decisions at the same time, and if the outcome depends on the decisions of the others.

The simple insight underlying John Nash's idea is that we cannot predict the result of the choices of multiple decision makers if we analyze those decisions in isolation. Instead, we must ask what each player would do, taking into account the decision-making of the others.

Nash equilibrium has been used to analyze hostile situations like war and arms races eg Prisoner's dilemma. There is enough evidence to convict each of them of a minor offense, but not enough evidence to convict either of them of the major crime unless one of them acts as an informer against the other.Game theory has been applied to contexts in war, business, and biology.

I’m not a big fan of this definition because it starts out with “The branch of mathematics ” Game theory is more related to economics and social sciences than it is necessarily to mathematics.

PDF | On Jan 1, , Kalyan (Ed.) CHATTERJEE and others published Game Theory and Business Applications. The purpose of Game Theory and Business Applications is to show how game theory can be used to model and analyze business decisions.

The contents of this revised edition contain a wide variety of business functions – from accounting to operations, from marketing to strategy to organizational design.4/5(1).

Parrondo's paradox is used extensively in game theory, and its application in engineering, population dynamics, financial risk, etc.. Parrondo's games are of little practical use such as for investing in stock markets as the original games require the payoff from at least one of the interacting games to depend on the player's capital.

Game theory has been applied to contexts in war, business, and biology.

What is game theory and what are some of its applications? - Scientific American

I’m not a big fan of this definition because it starts out with “The branch of mathematics ” Game theory is more related to economics and social sciences than it is necessarily to mathematics.

This simple game illustrates the essential aspects of what is now called game theory. In it, a game is the set of rules that describe it. An instance of the game from beginning to .

Game theory applications in business
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